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Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
Chapter 5
Poverty, Inequality, and Development
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The Growth Controversy: Seven Critical Questions
• What is the extent of relative inequality, and how is this related to the extent of poverty?
• Who are the poor?
• Who benefits from economic growth?
• Does rapid growth necessarily cause greater income inequality?
• Do the poor benefit from growth?
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The Growth Controversy: Seven Critical Questions
• Are high levels of inequality always bad?
• What policies can reduce poverty?
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Measuring Inequality and Poverty
• Measuring Inequality– Size distributions (quintiles, deciles)
– Lorenz curves
– Gini coefficients
– Functional distributions
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Table 5.1 Typical Size Distribution of Personal Income in a Developing Country by Income Shares—Quintiles and Deciles
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Figure 5.2 The Greater the Curvature of the Lorenz Line, the Greater the Relative Degree of Inequality
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Figure 5.3 Estimating the Gini Coefficient
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Figure 5.4 Four Possible Lorenz Curves
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Figure 5.5 Functional Income Distribution in a Market Economy: An Illustration
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Measuring Inequality and Poverty
• Measuring Absolute Poverty– Headcount Index
– Total poverty gap
– Where Yp is the absolute poverty line
– Yi is income of person I
TPG Y Yp ii
H
( )1
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Figure 5.6 Measuring the Total Poverty Gap
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Measuring Inequality and Poverty
• Measuring Absolute Poverty– Average poverty gap
– Where H is number of persons
– TPG is total poverty gap
APGTPG
H
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Measuring Inequality and Poverty
• Measuring Absolute Poverty– Foster-Greer-Thorbecke measure
Pn
Y Y
Y
p ii
H
p
1 1
( )
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Measuring Inequality and Poverty:
• Measuring Absolute Poverty– The Human Poverty Index (HPI)
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Poverty, Inequality, and Social Welfare
• What’s so bad about inequality?
• Dualistic development and shifting Lorenz curves: some stylized typologies– Traditional sector enrichment (see Figure 5.7)
– Modern sector enrichment (see Figure 5.8)
– Modern sector enlargement (see Figure 5.9)
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Figure 5.7 Improved Income Distribution under the Traditional-Sector Enrichment Growth Typology
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Figure 5.8 Worsened Income Distribution under the Modern-Sector Enrichment Growth Typology
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Figure 5.9 Crossing Lorenz Curves in the Modern-Sector Enlargement Growth Typology
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Poverty, Inequality, and Social Welfare
• Kuznets’ inverted-U hypothesis
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Figure 5.10 The “Inverted-U” Kuznets Curve
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Table 5.2 Selected Income Distribution Estimate
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Table 5.3 Income and Inequality in Selected Countries
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Figure 5.11 Kuznets Curve with Latin American Countries Identified
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Figure 5.12 Plot of Inequality Data for Selected Countries
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Poverty, Inequality, and Social Welfare
• Growth and inequality
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Figure 5.13 Long-Term Economic Growth and Income Inequality, 1965-1996
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Figure 5.14 Change in Inequality in Selected Countries, with or without Growth
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Absolute Poverty: Extent and Magnitude
• Extreme Poverty– $1-a-day headcount shows some progress
– Incidence of extreme poverty is uneven
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Table 5.4 Regional Poverty Incidence, 2004
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Table 5.5 Poverty Incidence in Selected Countries
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Table 5.5 Poverty Incidence in Selected Countries (continued)
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Absolute Poverty: Extent and Magnitude
• Growth and poverty – Impact on per capita growth
– Limited saving and investment by rich in poor countries
– Impact on productivity
– Lack of home demand
– Incentives for public participation in the development process
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Economic Characteristics of Poverty Groups
• Rural Poverty
• Women and poverty (See chapter 8 for more detail)
• Ethnic minorities, indigenous populations, and poverty
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Table 5.6 Poverty: Rural versus Urban
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Table 5.7 Indigenous Poverty in Latin America
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The Range of Policy Options: Some Basic Considerations
• Areas of intervention– Altering the functional distribution
– Mitigating the size distribution
– Moderating (reducing) the size distribution at upper levels
– Moderating (increasing) the size distribution at lower levels
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The Range of Policy Options: Some Basic Considerations
• Policy options– Changing relative factor prices
– Progressive redistribution of asset ownership
– Progressive taxation
– Transfer payments and public provision of goods and services
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Summary and Conclusions: The Need for a Package of Policies
• Policies to correct factor price distortions
• Policies to change the distribution of assets, power, and access to education and associated employment opportunities
• Policies of progressive taxation and directed transfer payments
• Policies designed to build capabilities and human and social capital of the poor
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Concepts for Review
• Absolute poverty
• Asset ownership
• Character of economic growth
• Deciles
• Disposable income
• Elasticity of factor substitution
• Factor-price distortions
• Factor share distribution of income
• Factors of production
• Foster-Greer-Thorbecke (FGT) index
• Functional distribution of income
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Concepts for Review (cont’d)
• Gini coefficient
• Headcount index
• Human Poverty Index
• Income inequality
• Indirect taxes
• Kuznets curve
• Land reform
• Lorenz curve
• Neoclassical price-incentive model
• Personal distribution of income
• Poverty gap
• Progressive income tax
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Concepts for Review (cont’d)
• Public consumption
• Quintiles
• Redistribution policies
• Regressive tax
• Size distribution of income
• Subsidy
• Workfare programs
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Appendix 5.1: Appropriate Technology and Employment Generation: The Price Incentive Model
• Choice of techniques
• Factor Price distortions and appropriate technology
• Possibilities of Labor-Capital substitution
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Figure A5.1.1 Choice of Techniques: The Price Incentive Model
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Appendix 5.2: The Ahluwalia-Chenery Welfare Index
• Constructing poverty-weighted index of social welfare